Economist Predicts Big Increase in 2007 Business Bankruptcies

The number of bankruptcies is likely to rise substantially in 2007
over the previous year, according to Dan North, chief economist for credit
insurer Euler Hermes ACI. North predicted earlier this year that business
failures would rise by 51% in 2007 over 2006’s level. First quarter bankruptcy
figures so far are proving North accurate, as bankruptcies were up 54% over the
number reported in the first quarter of 2006.

North has proven perceptive in other economic forecasts relating
to 2007. In December of 2006, when interviewed for an article in the January
2007 Business Credit magazine, North’s predictions were notably more
pessimistic for expected growth in GDP than the other economists interviewed.
Last December, North predicted U.S. GDP growth to be only in the range of
2-2.5%. Among his reasons for the lower growth estimates, North cited the
declining housing market, higher fuel prices and an inverted yield curve. An
inverted yield curve, an economic metric, indicates that interest rates on
shorter-term notes are yielding more than for longer notes. North said that in
the last 35 years, every time the yield curve is inverted a recession followed.
He stops short of predicting a recession but has recently revised his GDP
forecast for the U.S. in 2007 to just 2% or less.

Back in December, North and many other economists were not
predicting the crisis in the sub-prime mortgage market that has put a squeeze on
credit in general. The sub-prime mortgage debacle prompted both the European
Central Bank and the U.S. Federal Reserve to pump more money into the banking
systems. “I really think problems in the credit markets are not over,” North
said.

Beyond the credit crunch the sub-prime mortgage situation may
cause, North said the overall slowdown in the housing market is a drag on the
economy. The main reason is that falling housing prices are drying up home
equity loan lines of credit. This, in turn, will decrease the amount of money
consumers have to spend—for the U.S. economy, which is driven largely by
consumer demand, this is bad news. As for the effect an increased rate of
business failures will have, North sees it more as a symptom of the general
economic slowdown. “The vast majority of these businesses are quite small,”
North said. “They’re more likely a result of a weakening economy.”

North also predicts that the Federal Reserve will lower interest
rates starting when they meet next in September. “I think the odds are of at
least two rate cuts this year,” North said. Rate changes by the Fed take 4-6
quarters to permeate through the economy; however, he said, “It would have
immediate effects in the financial markets.” On when the economy may start to
perk up again, North said that it probably wouldn’t happen until early 2008.